Magazine

Trade Pacts: Boon Or Bust?

July 04, 2004

Last September, just weeks after the U.S. signed a free-trade agreement with Chile, Jack Warnell flew to Santiago. Warnell's Wilsonville (Ore.)-based JM Machinery & Parts Supply was already selling canning equipment in Mexico and Ecuador. About 20% of the company's $700,000 in sales was coming from outside the U.S. Warnell, knowing there was quite a bit of canned fish in Chile, expected Chilean sales to quickly add to that.

After a nine-day trip and several months of follow-up, Warnell's Chilean sales totaled only $6,200. "It's a mystery," he says. One possible culprit: The 19% value-added tax and the 7% duty charges levied on his wares, despite the trade pact.

Since NAFTA went into effect a decade ago, the U.S. has continued to negotiate trade agreements with dozens of countries. Agreements with Singapore and Chile went into effect in January, while those with Australia and five Central American countries await Congressional approval.

Trade officials promote the agreements as a boon to small businesses. But for small businesses as well as others, they've been a mixed bag. Generally, the pacts reduce tariffs, improve legal channels for U.S. exporters, and help protect intellectual-property rights. Rajib Sanyal, professor of international business at the College of New Jersey in Ewing, N.J., says they help small companies explore markets and find partners. The pacts' legal protections mean exporters can enter these markets with confidence they'll get paid, or at least have a way to address the problem if they don't.

That doesn't mean small companies should rush into a country just because a trade pact has been signed. Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business and former director of economics at the U.S. International Trade Commission, notes that Australia's economy was already fairly open and that Chile's is very small. And the challenge of distance and market development costs remain. Still, he thinks some entrepreneurs may benefit from the trickle-down effect. "Small businesses are more likely to profit on the basis of who they supply in the U.S," says Morici.

As for Warnell, he's not giving up on Chile. "It's just going to take more patience than I thought," he says, sounding like a veteran exporter.